Senator Rubio's Social Security Proposal

On Tuesday, Sen. Marco Rubio (R-Fla.) outlined a number of reforms for Social Security at the National Press Club in Washington.

His speech dealt with public policy on retirement in the 21st century, including a 4-point change to Social Security:  
 

1.     Eliminate the payroll tax for anyone over age 65 who continues to work.

2.     Remove the retirement earnings test for seniors 62 and over

3.     Raise the Social Security retirement age for those under the age of 55.

4.     Increase benefits for low-income seniors and reduce scheduled initial benefit levels for wealthy retirees.

His words were strong. Rubio warned the audience, "(By 2038), Social Security will have been bankrupt for years. This is not a scare tactic. It is a mathematical certainty. The longer we wait to address this the harder it will be to fix, and the more disruptive those fixes will be.” These words contrasts sharply with the 2012 election in which we heard "Social Security is - you know - structurally sound."
 

It is refreshing to see a politician speak candidly about Social Security for all Americans. At the same time, his comments paint a clear picture that the even the most courageous politicians remain distrait from a system on which they do not depend.

Oddly enough, a considerable portion of his proposal will make Social Security less solvent. Reducing payroll taxes will not help Social Security, particularly for seniors who, as Rubio notes, may get very little in return for their contribution. Removing the retirement earnings test will only encourage more people to start drawing benefits at 62, which creates near term pressure on the system. Likewise, increasing Social Security benefits for anyone makes Social Security less solvent.

There are two parts of his policy that will improve Social Security's finances. One will increasing the age of retirement for those who are 54 and younger.  The other targets wealthy retirees for lower benefit levels. So would these adjustments rescue Social Security for those under the age of 54?

The Social Security Administration has scored similar concepts, and the results generate little confidence that Rubio's changes will add "years" as he claims. The research from the Social Security Administration suggests that it is closer to months. It isn't even possible to say that these adjustments will offset the negative impacts of his other proposals.

These are scores of comparable ideas. None of these ideas increase the exhaustion point of the Trust Fund past 2033. The Social Security Administration :

·        scored a proposal to increase the retirement age for people 54 and younger. This change addresses about 12% of the financing gap.

·        projected that slowing the initial benefits of senior retiring in 2026 addresses 2% of the shortfall financing.

·        scored the changed to Chain-CPI would address 14% of the projected shortfall. That assumes of course that we change the system in 2016 rather than 2026, and apply the cost controls on all seniors rather than just those who reach normal retirement age after 2026.

There are some problems with Senator Rubio's proposals. Specifically, Social Security does not have insight into a retiree's wealth. His proposals use past income which may be connected to wealth, but it isn't possible to say that his changes will even target wealthy retirees.

It is difficult to criticize someone who has the courage to step forward when no one else will. It is however a tiny step, one that does almost nothing. In the words of Senator Rubio, "anyone who is in favor of doing nothing about Social Security is in favor of bankrupting Social Security." He is effectively doing nothing.

What Is Social Security?

Much of the contention in the debate about Social Security derives from one basic source: few agree on what Social Security is. Many see it as a safety-net program and most of the rest want to the system to be a retirement plan. Oddly enough it is neither.

Social Security is basically insurance. Insurance protects you from large costs that you may or may not have to pay.  The likelihood of living to 100 is about 1%.  The cost of living for more than 30 years without a job is staggering.  Like fire or health insurance, Social Security protects you against the cost of an unknown event. 

The terms of insurance vary by type.  For instance, auto insurance insures a momentary event.  Health insurance insures costs occur within a whole year.  Social Security measures longer old-age in two week intervals with a small check, one that may payout over a very long period of time.  The length of the event does not change the nature of insurance.
 

No insurance pays the full cost of the event, likely or not.  Social Security does not pay the full cost of living without working.  Social Security does not prevent poverty.  It provides supplemental income to provide the retiree some measure of certainty against falling into poverty ridden old-age.  FDR's words not mine.
 

Insurance is an expense, not an investment.  Without Social Security, how could anyone retire?  Without insurance, the worker would need to create sufficient savings to live 30 years or more.  That is a lot of savings to require of someone who expects to live about 17 years, and may live less than 1 in actual retirement.  Insurance allows the worker to buy protection against the possibility that he might have an extended life, enabling him to retire at a reasonable age.
 

Insurance fits into a retirement plan with other tools.  When it was designed, Social Security was suppose to be only one part of a three legged stool.  The rest of the stool was private savings and private pensions. An investment is something that accumulates the wealth on which you retire.  Insurance protects that wealth so that you do not have to draw it down too early in retirement.
 

Some people argue that the force of law exerted by the government makes Social Security a welfare program.  Yes, Social Security is legally required for most workers.  This requirement is no different than the one by which most states have for auto insurance.  Yet your auto insurer is not an arm of the government to provide welfare.  The legal requirement to participate does not change the nature of the program. 

The reason that many struggle with the nature of Social Security comes from the way we pay for it.  The pay-as-you-go system doesn't work.  Instead of old-age insurance, this approach structures Social Security as i-dont-want-to-live-with-my-parents insurance. Invariably we look at the cost as too high, the benefits too low, and give politicians the power to sort-out the difference.  This is the unavoidable outcome of using the money of one to buy the insurance of another.

Until we agree upon what Social Security is, there will be no way to fix it.